7 IRA Strategies For The End Of 2018

Retirement
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It’s time for IRA owners to be proactive by planning and implementing their strategies for the rest of the year. Consider these steps now and take those that are appropriate for you.

Caution: Don’t wait until the last few weeks of the year to consider your actions. IRA custodians are very busy then. Many won’t process requests for some types of transactions during the last couple weeks of the year or won’t guarantee they’ll be completed by December 31.

Use QCDs to make charitable contributions. It’s one of the best ways to make charitable contributions, though it’s available only to owners of traditional IRAs who are ages 70½ and older.

The Tax Cuts and Jobs Act made the qualified charitable distribution (QCD) even more valuable. The law increased the standard deduction and reduced the itemized expenses that can be deducted. The result is that fewer taxpayers will be itemizing expenses and deducting charitable contributions.

In a QCD, you direct the IRA custodian to send a contribution directly to the charity of your choice. Or you can have the custodian send you a check made payable to the charity, which you deliver to the charity.

The distribution isn’t included in your gross income, yet it counts toward your required minimum distribution (RMD) for the year. You receive no deduction for the contribution. You can use the QCD to make up to $100,000 of contributions each year.

Optimize your RMDs. Required minimum distributions (RMDs) from traditional IRAs must begin after you turn age 70½. They’re also required from inherited traditional or Roth IRAs at any age. The penalty for not taking a full RMD is 50% of the amount that was supposed to be distributed but wasn’t.

You want to correctly calculate the RMD for the year and be sure at least the full amount is distributed by December 31.

For traditional IRAs other than inherited IRAs, when you own more than one IRA you can aggregate the RMDs and take them from the IRAs in any ratio you want. But for inherited IRAs (whether traditional or Roth) and for most employer retirement plans, the RMD must be separately calculated and distributed from each account.

Plan to reduce future RMDs. You have to take RMDs whether you need the money or not, and RMDs from traditional IRAs are included in gross income. The percentage of the IRA that must be distributed each year increases. Many people find that when they are in their late 70s and beyond, RMDs are much more income than they need and cause income tax problems.

There are strategies that can reduce future RMDs and increase the after-tax wealth available to you and your heirs. You can simply empty the IRA earlier than required by law. You also can convert the traditional IRA to a Roth IRA. People with very large IRAs can consider strategies such as taking money out of the IRA to fund a charitable remainder trust or permanent life insurance policy. Consider discussing strategies to reduce future RMDs with a financial or estate planner.

Consider converting traditional accounts to Roths. This is the most frequently-used way to reduce future RMDs. You can convert a traditional IRA into a tax-free Roth IRA, but you have to include the converted amount in gross income as though it were distributed and pay income taxes on it. Sometimes paying taxes early this way makes sense.

The decision of whether to convert a traditional IRA to a Roth IRA should be reviewed regularly. A lot of variables are involved, and frequently there are changes in the variables.

The 2017 tax law is one major change, because it lower tax rates. If you’re in a lower tax bracket, the tax cost of converting the IRA will be lower than it would have been last year. Also, there’s a higher probability that income tax rates will increase in the future. It could be less expensive to pay the taxes now at today’s rates than in the future at higher rates.

Another factor is the 2017 law eliminated the ability to reverse an IRA conversion. You have to analyze the conversion decision more carefully than in the past, and many advisors now recommend delaying the decision until the last few months of the year.

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Coordinate withholding with estimated tax payments. You have to prepay income and other taxes through a combination of estimated tax payments and withholding. Estimated taxes have to be paid either evenly during the year or as income is earned. You can’t avoid penalties by making one large lump sum payment late in the year.

Avoiding penalties for underpaying estimated taxes often is difficult for retirees, because some income is out of your control and often is earned unevenly during the year.

Having taxes withheld from traditional IRA distributions is a good way to prepay your taxes and avoid penalties for not making estimated tax payments as income is earned during the year. Though estimated tax payments are considered to be made on the dates you made the payments, tax payments made through withholding are assumed to be paid evenly during the year.

So, if you’re behind on estimated tax payments, arrange to have taxes withheld from traditional IRA distributions late in the year.

Update beneficiary forms. It is critical that you update the beneficiary designations on file with your IRA custodians and other retirement plan administrators. The key rule is that your IRA is likely to be inherited by the person named on the form on file with the IRA custodian. It doesn’t matter how old that designation was or what’s in your will.

Too many people haven’t reviewed their IRA beneficiary designations for years, even decades. Births, death, marriages, and divorces are the events most likely to warrant a change in beneficiaries. At least annually consider whether you should add or delete a beneficiary or change the percentage each inherits.

Maximize and optimize the year’s contributions. You can contribute to traditional IRAs through age 70½. Roth IRA contributions can be made at any age. Contributions for 2018 can’t exceed the lower of your earned income for the year or $5,500 ($6,500 for those 50 and older). IRA contributions can be made anytime through April 15 of the following year, so contributions for 2018 can be made through April 15, 2019. Of course, the earlier the contribution is made, the more time there is for income and gains to compound in the IRA.

Contributions to traditional IRAs aren’t deductible if you are covered by an employer pension plan, including a 401(k), or if your income exceeds certain levels.

You can make nondeductible contributions to a traditional IRA, but that might not be the best strategy. It might be better to contribute the money to a Roth IRA or leave it in a taxable account. That’s primarily because all income and gains distributed from a traditional IRA are taxed as ordinary income. With a taxable account, you have the potential to earn tax-advantaged income such as long-term capital gains, qualified dividends, and tax-free interest. With a Roth account, all the income and gains can be distributed tax free after you’ve had a Roth IRA for more than five years.

Reconsider how IRA fees are paid. In the past, when you had an investment advisor manage your IRA or give advice about it, those and any other fees for the IRA could be deductible as miscellaneous itemized expense deductions on Schedule A, if they exceeded certain limits.

That’s no longer the case. Investment-related expenses, such as IRA expenses, no longer are deductible on individual tax returns.

The best strategy for most people now is to have the fees deducted from the IRA. Be careful not to take a distribution and then use it to pay the adviser. That would be a taxable distribution to you, and you won’t receive an offsetting deduction.